With a tough 2012 still fresh in their minds, you would have thought
National Australia Bank
investors would be pleased with a solid profit for the first half of 2013 that did not contain any nasty surprises from the bank’s troubled business in the United Kingdom.

But with NAB shares up more than 30 per cent in 2013 and rival banks shooting the lights out with their profit results, investors were perhaps looking for a little bit more.

Shares in NAB have eased back by about 3 per cent since Thursday, when the bank announced a $2.9 billion cash profit for the six months to March 31, 2013.

“After a difficult financial year 2012, investors would usually be happy with a clean, in-line result from NAB," UBS banking analyst
Jonathan Mott
said in a report.

“However, post a 33 per cent rally year to date [in NAB shares], investors were hoping for more."

NAB’s first-half profit was 3 per cent higher than its result in the same period in 2012 and 12 per cent up on the second half of last year, when the bank felt the full force of a surge in bad debts at its Clydesdale and Yorkshire banks in the UK.

The result was underpinned by a 19 per cent surge in earnings at NAB’s personal division after the bank held back some of the Reserve Bank of Australia’s interest rate cuts from customers last year.

NAB’s wholesale arm was another standout, growing profits by 19 per cent thanks to strong sales of risk management products to institutional clients.

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NAB chief
Cameron Clyne
described the result as “solid" and while most analysts agreed with him, there were a few points to quibble with.

For starters, revenue growth was subdued given industry-wide weakness in demand for loans, while costs were also higher than some bank watchers had expected.

And then there was the bank’s dividend.

NAB increased its half-year dividend by 3¢ a share to 93¢ a share, a bigger payout than had been anticipated by the market ahead of the half result.

But the payout lacked the wow factor of rival Westpac Banking Corp, which a week earlier had increased its regular half-year dividend and also rewarded shareholders with a special one-off dividend.

Australia and New Zealand Banking group also flagged higher payouts in the future after lifting its half-year dividend.

“NAB delivered a first-half 2013 result with cash net profit after tax . . . meeting consensus expectations, but a touch softer in composition than we were expecting," Mr Mott said.

“While revenue was broadly in line, cost growth was higher than expected."

So, where to from here for NAB investors?

For a long time, NAB has been viewed as the worst house in the best street as far as Australia’s big four banks are concerned.

The difference between it and ANZ, Commonwealth Bank of Australia and Westpac has undeniably been its troubled UK banks, which have been the source of much angst and share price weakness for NAB in recent years.

The bad news is that with the UK in the grips of its slowest recovery from a recession in a century, there is no quick fix for NAB in Britain.

Still, there are positive signs that a major restructure announced by Clyne in the UK last year is beginning to bear fruit and the hope is that the worst could possibly be behind the bank in Britain.

Over the past year, a portfolio of troubled commercial real estate loans in the UK that NAB is trying to run off reduced in size by £1 billion to £5 billion.

The bank’s bad debts also fell by $142 million in the first half of 2013 compared with the second half of 2012, owning largely to lower losses in Britain.

Deutsche Bank analyst
James Freeman
said NAB was “heading in the right direction", adding that “it will just take time"

“We do believe that over the coming periods things will improve for the UK and [the] UK commercial real estate, especially at the bad and doubtful debts line," he said.

Of the analysts that cover NAB, 11 have “buy" ratings on the stock – the highest of the big four banks – while seven say investors should hold and just one recommends they sell out.

Despite a strong rally in 2013, NAB shares, which closed at $32.47 on Friday, trade on a “price to earnings" ratio of around 13 times, suggesting they are a cheaper option for investors than ANZ at 14 times and CBA and Westpac at 15 times.

“Having consistently delivered sub-peer operational performance in the past NAB is still trading cheaply [and] priced for pessimism in perpetuity," CLSA analyst Brian Johnson said in a report.

“If NAB can deliver peer earnings per share growth it should outperform, but if it delivers above-peer earnings per share growth by virtue of home-loan and business-loan repricing, it will outperform the sector."